US Economic Outlook

Dean Maki Co-Head of US Economics Research April 2009

Please read carefully the important disclosures at the end of this publication.

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Key outlook themes

  US GDP to contract sharply through H1 09, as credit tightening, financial turmoil, and slower exports bite

  Sharp contraction rotating to businesses from consumers

  Fed to stay on hold at 0-0.25% through 2010; market interventions now the main policy tool

  Headline inflation to be negative y/y for most of 2009, core inflation to decelerate

2008 2009

Q3 Q4 Q1 Q2 Q3 Q4

Real GDP (% q/q saar) -0.5 -6.3 -5.5 -2.0 1.0 2.0

Unemployment rate (%) 6.1 6.9 8.1 9.1 9.5 9.8

Headline CPI (% y/y) 5.3 1.6 0.0 -1.4 -2.1 0.8

Core CPI (% y/y) 2.5 2.0 1.7 1.7 1.3 1.4

Fed funds rate (%) 2.00 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

Source: Barclays Capital. Note: Interest rate figures are end of quarter.

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Real GDP to contract less sharply in Q2 09; rotation occurring

Source: BEA, Haver Analytics, Barclays Capital.

Forecast

f/c

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Source: BEA, BLS, Haver Analytics.

Decline in inflation supporting consumer real income and spending

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Production has been cut far below the growth of goods consumption

Source: FRB, BEA, Haver Analytics

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The gap between production and consumption points to a large inventory cut

Source: BEA, Census Bureau, Haver Analytics

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Source: BEA, Haver Analytics, Barclays Capital

We look for the largest quarterly inventory decline on record

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Source: Census Bureau, Haver Analytics.

New home inventories falling sharply; months supply above previous peaks

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Source: Census Bureau, BEA, Haver Analytics.

Bottom in starts closely follows bottom in sales; housing drag to fade in 2009

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Housing affordability highest in decades

Source: WSJ, National Association of Realtors, Haver Analytics.

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Source: BEA, Haver Analytics.

Credit-sensitive sectors have already been crushed

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Fiscal package is massive

Stimulus packages

billion % of GDP

2001 tax cut $174 1.7%

2003 tax cut $231 2.1%

2008 rebate $150 1.0%

2009 $787 5.6%

Source: BEA, CBO, Barclays Capital.

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Fed balance sheet set to grow sharply this year

Source: FRB, BEA, Haver Analytics, Barclays Capital.

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Some evidence of progress from credit market intervention

Source: FRB, Bloomberg, Haver Analytics.

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Some evidence of progress from credit market intervention

Source: FRB, FDIC, Haver Analytics, Bloomberg.

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Headline inflation to decline substantially

Source: BLS, Haver Analytics, Barclays Capital.

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Source: BEA, Haver Analytics.

Service sector is key for deflation risks

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Source: Japanese Ministry of Internal Affairs and Communications, BEA, BLS, NBER, Haver Analytics, Barclays Capital.

In Japan service prices flattened; wages drive service sector inflation

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Value of household assets is falling

Source: FRB, Haver Analytics.

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Household wealth has moved lower

Source: FRB, Haver Analytics.

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Wealth effect has turned negative

Source: FRB, Barclays Capital, Haver Analytics. Note: Shaded region indicates Barclays Capital forecast through H2 2009.

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Source: BEA, Barclays Capital.

Business investment spending has been subdued

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Corporate profit margins sliding

Source: BEA, Haver Analytics.

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Earnings growth has not decelerated much as unemployment rate increased

Source: BLS, Haver Analytics.

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